Industrial Organization is the area of economics that studies the markets as institutions, the state of competition and strategic interaction among firms, the industrial policy and the business decisions firms make within the market framework. The course looks at the markets from three different perspectives: the economic theory, the applied business perspective and the institutional and legal perspective. The focus of the course is split equally between the economic theory and business perspective but there is a significant legal component incorporated in various topics. The course includes economic modeling, game theory, numerous real life examples and several case studies. We explore interesting topics of market organization such as negotiations, antitrust, networks, platforms, electronic markets, intellectual property, business strategies, predation, entry deterrence and many others.
The basic objective of the course is to enable the student to understand the structure of markets and the nature of strategic competition. Knowledge in this course will be valuable for the students in acquiring managing and governance skills, enriching their understanding of the institutional framework of business, and improve their analytical ability in negotiations.
Prerequisites: The course requires understanding of basic economic modeling, knowledge of intermediate microeconomics (especially production/cost theory), knowledge of basic concepts and methodologies of game theory, intermediate econometrics and basic calculus.
Do you have technical problems? Write to us: coursera@hse.ru

審閱

DS

excellent thank you. How to add further value? Perhaps a few more models. particularly towards the end.

AJ

May 30, 2020

Filled StarFilled StarFilled StarFilled StarFilled Star

It was very good course Got so much knowledge Thanks for organizers .

從本節課中

Price discrimination

The topic for this lecture is pricing. In general in economics, we are used in a paradigm in which firms set only one price for each of their products. Sometimes this is indeed the case but, often, we observe that firms charge different prices to different consumers or different occasions or different purchased quantities. In reality, when a firm has some market power and the consumers are each not willing to pay the same for every unit, the firm can price-discriminate to increase its profits. We will analyze the three degrees of price discrimination, tying, bundling and several other methods of advanced pricing. We will also present a brilliant pricing case study with Polaroid.

教學方

Kosmas Marinakis

腳本

Good afternoon, and welcome back to industrial organization. Today, we will talk about price discrimination. And I have to tell you right from the beginning that this is my favorite lecture, my favorite part of industrial organization in general. When you start becoming an economist, you see things in a different way. You walk into a store, you see the product, and you say, hey, there's something about the demand or the supply of this product, something peculiar, something interesting. And then, you have your most usual variable, and this is price. Price appears almost in every model in economics. And you say, okay, what is price? What does it stand for? What do we mean by price? Because I remember since I started becoming an economist when I was like, I had only a few lessons in economics, I would walk into a store and I would think about the price, the demand and supply law that determines the price. And then, I would say, okay, what's the equilibrium price for example, for Coke? And you would see at the store that there's not only one price. There are different products from the same company, there's proliferation of products that they charge different price for the can, different price for the small bottle, different price for the bigger bottle, and different price for the six pack. And you see that these prices are not even similar for each price per milliliter. So, they change the price even per milliliter, and this pricing scheme with a basic knowledge that they had back then, it did make sense to me and I started becoming curious about the price. So, in our previous analysis and in your previous analysis in economics before this class, you probably assumed that firms just charge one price per unit. And this is a single universal price, and we do not deviate from that. However, in reality, as we just said, firms charge different prices to different consumers and even sometimes to the same consumer. If we relax this assumption that you have to charge only one single price no matter who is shopping from you and how much quantity is shopping from you, then you give the firm some more degrees of freedom in order to maximize its profits, so you give it more tools in the profit maximization instead of just one, the price. So, this is our usual graph that I will show you now, you have seen this graph before, you have a demand system where it's a well-behaved downward sloping demand curve, the dark blue one. And then, you have the marginal revenue curve that comes from this demand curve. And, we also have the marginal cost. Now, from your introductory microeconomics classes you know that, if you have a perfectly competitive market, the marginal cost is also the supply, a part of the marginal cost of the supply for your firm. And therefore, supply equals demand will give me my equilibrium price and my equilibrium quantity, and I have here an index of C which shows like this would be the competitive equilibrium in this market. Now, things will be different if you are monopoly. If you're monopoly, you can charge a higher prices. How are you going to maximize your price you know from your microeconomics? You do that when MR equals MC. So, this is the other intersection that happens in our graph, and therefore, who will get that the price will be much higher than the competitive price, so monopoly will charge a higher price than their perfectly competitive firm. Now, what I want you to notice in this graph is that, still, if you have a monopoly, your consumers get away with what we called consumer surplus. So, there is a consumer surplus that is still remaining even if you are a monopolist and you charge a strictly monopolistic price, the maximum price that you can get away with with acquiring maximum profits. So, the monopolist sees that yellow area here in the graph and says, wait a second, I have market power, there is some more surplus there, why don't I get it? So, the producer wants to get everything he cans, everything possible from this market. If it's possible to get the entire yellow area, will do it pleasantly. So, let's see now how these can happen. First of all, price discrimination give you several techniques in order to be able to get a little bit more or even all of it, this consumer surplus. So, the target here in our entire lecture today, the target will be, how to get a little more or even all of it from the yellow area, the yellow slice that I showed you before. So, we will need to examine techniques of how this will happen. First of all however, we have to understand that there are two important limitations. You will not see different prices when you have two of the following cases that I will show you now. The first is what we call, arbitrage. Arbitrage is the perspective of transactions between consumers which lessens the scope of price discrimination. How does this happen? Imagine that they have two consumers, and my two consumers have very different demand for the product, one loves the product and the other one just likes the product. So, the one who loves the product is willing to pay a higher price for the product, and the one who just likes it is willing still to buy but at the lower price. So, what I can do, is that I can sell the product to two different prices to the two different guys; the one who likes it more will pay more, then one who likes less will pay less. Now, if there is a possibility for my consumers to also trade, then, the consumer who just likes the product can get more at a lower price and resell it for a profit to the other guy that will like it more. And if he gives the product to the other guy who likes it more at the cheaper price than I do, then this will diminish the scope of price discrimination that their original seller does. The second problem that price discrimination has is, information scarcity. And information scarcity has to do with the fact that the seller needs to find their way in order to understand how much each consumer is willing to pay. In my previous example, I cannot go and ask the two guys, so how much you like the product? Because they will understand that I ask this question in order to charge more. Therefore, take advantage of them, and they will have an incentive or strong incentive to not reveal their true preference, but they will probably lie and say, it's okay I don't like it that much, I would buy it but if it's only if it's very cheap. And this technique that most of us when we bargain in things that you can bargain, like for example, when you buy a new car, you should never go to the dealership and show how much you really really love this car. Maybe you love it, maybe you desperately want it, but you will be like, yes, it's okay, it's good, all right because you don't want to be charged a higher price for this product. So, consumer will not truthfully reveal their willingness, we have a problem of information, and if you do not have enough information, then prices commission will be extremely difficult to happen. So, these are the limitations, I have to give you the limitations from the beginning so you know what to expect. But I will also show you some very cool tricks that you can get a way from this problems and really maximize profits. Price discrimination happens in three degrees. There're three degrees that we just call them like that. So, it's the first degree, then after first is the third and then, second. So, one, three, two, sounds about right? So, first degree is the perfect price discrimination, meaning that every unit of the product for every consumer has a different price. So, you charge different prices for every unit for every consumer, have almost infinite amount of different prices. There's a third degree price discrimination that we call it the segmentation price discrimination because what we do is that, we split the market into groups, and we charge different prices in these groups. Now, in this definition I just gave you the most important word is, we. We split the market, not the consumers themselves. We directly identify the consumers and we say that, those consumers will pay that, the other consumers will pay this. Then you have the second degree price discrimination in which again, you split the market into groups, but now, consumers themselves decide who is going to join which group. This is called the self-selection price discrimination and it's very different from the third degree. Now, the order is a little not right. As you can see, it's not my preference. I know how to count. But the thing is that in most books, almost in every book, they appear in this order because the third degree price discrimination makes a little more sense to be presented before the second degree price discrimination, and I think that in the end of this lecture, you will be understanding the reason why this happens. One more thing before we begin, in our discussion today, we will talk about price discrimination in the context of a single firm. But, price discrimination in general, is contingent to the amount of market power your firm has. That means that, monopolies have a lot of market power, the maximum amount of market power that can be in the market but other firms also have market power. You don't need, it's not required to be a monopoly in order to have market power. So, if you are not a perfectly competitive seller, then you do have some amount of market power, and this will be sufficient for you to do price discrimination to charge different prices to different consumers, given of course that they will not do arbitrage, and you can have some information who you are going to charge a higher price, and who you are going to charge a lower price. So, in our analysis, we will talk about the context of the single firm but you can understand that this is not a limitation, you are able to take this analysis and carried over to the case where firms are in different kinds of markets like oligopoly, monopolistic competition, and they do have some market power less than monopoly but still can get their way with price discriminating. Stay with us. We are going to start with the first degree price discrimination right away.